The recognition of the will invalid: theoretical and practical aspects

The article, written by a lawyer of “Expert-SM”, Gunay Abasova, presented at the 12th Republican Scientific and Practical Conference. Download

Corporate Law. RESPONSIBILITIES OF THE DIRECTOR AND THE BOARD OF DIRECTORS IN STOCK COMPANY AND THE PRINCIPLES OF CORPORATE GOVERNANCE OF THE OECD

As a result of the fact that Azerbaijan has not developed the Code of Corporate and foreign investors who wish to ensure the security of money, according to corporate governance is the best guarantor of raising capital, corporate legal relations governed by the provisions of the Civil Code of the AR of the year 2000. However, the provisions of the Civil Code of the AR is not sufficient to resolve all issues of corporate activity due to specificity of the subject of the settlement, and in general, the ability to cover all mental, psychological conflicts in corporate governance only by Civil Law. Naturally, there is a necessity to develop in terms of mentality, customs and culture of Azerbaijani people, not just copy off, the Corporate Code or other legal act governing the corporate relationship.

Many companies of Azerbaijan Republic (about 13 large companies) has implemented the principles of corporate governance, developed by the OECD (Organization for Economic Co-operation and Development (OECD)) from the 27th -28th of, April 1998 and according to their data have been developed their own management techniques, though without having any significant distinguishing features of corporate governance.

Positive aspects of the OECD Principles is that the shareholders regardless of their country of origin shall have equal rights and responsibilities; taken measures to protect minority shareholders; developed mechanisms from the state intervention in the management of large JSC. However, in § C of Section V of the OECD Principles, “the board should ensure compliance with applicable legislation and consider the interests of stakeholders”. The question arises: which stakeholders and compliance with the law of which state, if the OECD is a club of industrialized nations and the members of this organization are the 34 countries of Eurasia, America, including the U.S. and Japan, but not China and Russia?

Deprived of the possibility to impose sanctions, the OECD, however, can in its comparative studies to criticize and make recommendations to improve the situation of corruption, banking, corporate law in the country, thereby affecting to the flow of foreign investment and the formation of opinions about the loyalty of the government of any State. Subjects of research each time determined by all governments – as well as representatives of the country caught up in the spotlight.

Negative aspects, in our view, the OECD Principles of Corporate Governance is the absence of a mechanism to prosecute the major parties control of Board of Directors, potential risk management of large JSC with foreign countries to the detriment of the country; mechanisms of protection shareholders’ interests are calculated on a greater share of profits and control of strategic important areas of the country’s economy.

However, it should be noted that in Azerbaijan, companies of strategically important sectors such as oil and gas, are not made in the form of open and closed joint stock company. For example, large enterprises such as “Socar-Petrolium”, “Socar-Baglan”, “Socar Qalf”, “Azerbaijan John Braun”, “Ecol”, “Energy Solutions Qroup” created in the form of closed joint stock company, where the Azerbaijan State Oil Company owns 49%, 50%, 51%, while the remaining shares are held by the British, Turkish, American, Russian companies, UAE, etc. Due to the fact that banks are established in the form of open joint-stock companies, the ability to purchase shares in various countries and correspondingly the level of their influence are increases. According to the study of the banking sector became clear that the highest participation rate in the banking sector of Azerbaijan belongs to the International Finance Corporation, which owns shares in three banks: in AccessBank-20%, AGBank-17, 5% and YapiKrediBank-20%.

In addressing issues of accountability CEO or member of the Board of Directors, is necessary to precisely determine that the settlement will not be based on the Principles of Corporate Governance, but on the Labor Code of Azerbaijan, the Civil Code of RA and other legal acts of the Cabinet of Ministers, and so etc., as well as on the conditions of the contract between the Director-General and the Joint Stock Company.

In prosecution of the governing bodies it should be considered the following nuances:

– If several persons are liable, their liability is solidary before the joint-stock company;

– In determining the basis and amount of liability must be taken into account in the usual conditions of business intercourse and other circumstances important for the case;

– Representatives of the State or municipality on the board of directors (supervisory council) of JSC are responsible along with other members of the board of directors;

– Members of a collegial body, voted against the decision that led to losses, or not voting at all, are not liable.

According to Article 193 of the LC AR, head of the organization is fully liable for any direct (real) damage caused to the organization by his culpable actions. Therefore, if we assume that with the sole executive body by member of the collegial executive body concluded an employment contract, his liability for damages caused to the company will be limited to the amount of actual damage. Loss of profit is not refundable. Therefore, the labor contract with the general director of the stock-company contains concepts (joint and several liability, property liability, damages, trade secrets), and other provisions should be clearly stated in the contract. Such decision raises certain doubts and does not allow increasing financial liability of managers of the company for the damages caused by their illegal actions. Lawmakers consider it necessary to define the specific conditions and grounds of full material responsibility of the manager, sole executive body of the joint stock company and a member of the collegial executive body; to establish an exhaustive list of relevant cases.

If functions of the sole executive body by the decision of the general meeting passed according to the agreement of the commercial organization (management company) or the individual entrepreneur (manager), as defined in Art. 107.4 CC AR, then the responsibility of this body for losses caused by Joint Stock Company, is determined by civil law, ie is complete.

General Director (CEO) as the person performing managerial functions is responsible to the State (including criminal and administrative). Administrative responsibility – the responsibility for offenses relating to failure to comply with the established rules in the area of protection of the order management, state and public order, nature, public health and other rules, enforcement of which is included in job responsibilities. According to the legislation of Azerbaijan, depending on the foundation of the obligation liability of the persons is contractual (the base – an agreement, the contract) and non-treaty (the base – a legislative act). On the general director (manager) applies both contractual and non-contractual liability. Administrative responsibility is non-contractual liability. An example of contractual liability may be responsible for the disclosure of trade secrets.

Labor Code of Azerbaijan does not provide the ability to protect the property interests of shareholders in the management of a joint-stock company. The maximum that the Joint Stock Company could receive as compensation in the event of it damages actions (or inaction) General Manager – financial compensation for actual damages. The maximum that the Joint Stock Company could receive as compensation in the event of it damages by actions (or inaction) of General Manager – is financial compensation for actual damages. On the possibility of applying measures of material liability to the General Director (under the responsibility of the person of a joint stock company administration) used in labor law, we can note the following.

With full liability damage shall be compensated in full, without any limitation in size.

General Director bears a full liability in case of:

– entrusting on it the full financial liability by certain laws and regulations in connection with causing by him damage in the performance of job duties;

– when the damage was caused by criminal acts, established by a court sentence.

On employer, in accordance with the LC AR, material liability does not cover, he bears property responsibility. Separately, is necessary to stipulate in the employment contract, in accordance with the civil law of AR, financial liability of a citizen in decision-making as the executive organ of the joint-stock company. The main differences of this kind of responsibility from material liability: compensation carried out from the property of a citizen, rather than from his salary, and in a larger amount – taking into account loss of profits.

In addition, the Chief Executive Officer (CEO) bears joint liability for the decision taken by the collegiate governing body of the joint stock company, if this condition specified in the contract (due to the fact that the Azerbaijani civil law there is no imperative for joint and several liability of the director). He was relieved of responsibility for the decision taken of a collective body, if expressed his disagreement in writing.

Also, we emphasize that the joint-stock company should not only take actions to terminate the authority of guilty for causing damage General Director, board members and to bring them to liability for breach of their obligations to the joint-stock company, but also at their own expense to carry out liability insurance of General Director, board members, so that, in the event of damage of the joint-stock company or to any third party by actions of these individuals, the losses could be recovered.

The introduction of such a mechanism allows not only improve the efficiency of civil liability, but also implicated in the executive bodies of competent professionals who otherwise would have feared bringing them large claims.

In conclusion, I would like to point out that developing a Corporate Code of Azerbaijan not only in terms of rights and obligations of shareholders, adopting the “frame” the OECD, but also measures the full responsibility of the governing bodies of joint-stock company, having developed the principles of management, taking into account the customs, traditions and mentality of its entrepreneurs, the Azerbaijani business would have done better and conceptual development of the economy.

Subhan Mammadov,

Managing Partner

of the “Expert-SM” Law & Consulting Company